I'm founder of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of precious metals fund manager Monetary Metals. I created DiamondWare, a technology company which I sold to Nortel Networks in 2008.

Inflation Is A Weak Argument For The Gold Standard

The most popular argument against the fiat dollar is that it’s prone to inflation—defined by most people as rising prices. We must switch to the gold standard, according to this argument, because the paper dollar causes consumer prices to rise relentlessly.

It’s true. Prices have been going up ever since the Fed began centrally planning the dollar. If you’ve ever seen an old Coca Cola sign or Sears Roebuck catalog, or just remember the price of gasoline in the 1960’s, you know how much it adds up over long periods of time.

The Fed’s mission is supposedly to fight inflation. In fact, one of its Congressional mandates is to keep prices stable. This is like setting the fox to watch the henhouse, with a mission to keep the hen population stable. No one really believes the Fed cares about stable prices.

The Fed itself openly hungers for rising—that is unstable—prices. Their Federal Open Market Committee has a policy to cause two percent annual increases. This is robbery, pure and simple.

Unfortunately, the inflation argument just isn’t compelling. Suppose you try it on Joe the skeptic. He shrewdly asks, “So inflation is like a tax?”

“Yes,” you concede. “It is. As I just showed you, the government is taking a portion of your wealth every year.”

Joe may be skeptical, but he’s not stupid. “Sales tax is four times worse than inflation, and the income tax rate is a lot higher than sales tax,“ he notes. He’s right.

Joe concludes, “We should go back to the free market.” He is a free-market skeptic. “Just put inflation on the list of taxes we should repeal someday.” He just doesn’t see any urgency over a two percent tax. We can quibble that inflation is really higher, but that doesn’t change the equation. For reference, the Bureau of Labor Statistics calculated 1.5 percent inflation last year.

One complication with the rising prices argument is that some prices aren’t rising. Last year, I bought a pair of Levis jeans at Macy’s for $45. I recall buying a pair of Levis at Macy’s in 1983—over 30 years ago—for $50. We can dismiss this as the result of improved production efficiency and cheaper labor. Still, the fact is that the price dropped.

The prices for some things are falling. You can get a cheap computer that fits in your pocket today. It outperforms a cabinet-sized computer that cost $15,000 in 1983 dollars, and does a lot more besides.

Consumer prices are a lousy way to try to measure the falling dollar or inflation.

Even if you somehow overcome these objections, the argument is not compelling to Sally, the wage earner. She trusts that her annual raise will more or less keep up with inflation. And it does, more or less. There is a slow loss, but it’s a fraction of the inflation rate. In retirement, her pension and Social Security check will be indexed to inflation. “I have to go back to work now,” Sally says, as she walks away. She doesn’t have enough money in the bank to get worked up over how much value it’s losing.

Nor is the argument compelling to John, the investor. “The value of the properties I own has gone up 22%,” John states proudly. “I only put down 20%, so my return is much higher than that.” John is also heavily invested in the stock market. “My stocks have tripled since 2009,” he adds. “I don’t really want the Fed to print so much but, if anything, it’s good for me,” John says as he gets into his Ferrari. “Talk to you later.” His portfolio is going up much faster than inflation.

The inflation argument distracts us from two critical problems. Debt at every level of the system is rising exponentially. At the same time, the interest rate is collapsing.

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